Stock Manipulation, Bed Bath & Beyond as a Meme Stock, and Ryan Cohen
On Friday, September 2, the man who lived on the 18th floor of 56 Leonard Street in New York’s Tribeca district didn’t go to work or, perhaps, he came home very early. We know only that at about 12:30 in the afternoon, he fell from one of the balconies of his luxury apartment, landing on the roof of an adjacent building. Someone called 911. A crying woman appeared and accompanied the paramedics and the body to the hospital. Though some video was shot by journalists at the scene, the story didn’t get much publicity. It was carried by the New York Post, which said the man was pronounced dead at the scene, adding that the police had not offered further details.
It wasn’t until Sunday afternoon that the victim was identified as Gustavo Arnal, chief financial officer and executive vice president of troubled home décor retailer Bed Bath & Beyond (BBBY). Arnal, 52, lived in the “Jenga Building”—so-called because its asymmetrical balconies are reminiscent of the popular game—with his wife and two adult daughters. According to the Post, he “didn’t say a word to his wife before apparently leaping to his death.” Neither did he leave a note.
The medical examiner ruled the death a suicide. Bed Bath & Beyond’s interim chairwoman, Harriet Edelman, conveyed her condolences to the family in a company press release. Colleagues and social media friends said they were shocked; that what he’d done seemed to them out of character.
Arnal was born in Venezuela, and as a young man taught school there. Interested in business and the markets, he changed direction and eventually left the country for good. He worked for Proctor & Gamble in the States and in Europe for 20 years, and then moved to Avon for a shorter time, working from London. He joined BBBY in 2020 as an experienced corporate leader. When CEO Mark Tritton and other members of top management were purged at the end of June 2022, Arnal stayed on, though one wonders whether the fact that he was renting his Jenga apartment (for more than $18,500 a month) suggests he wasn’t sure how much longer he’d be in New York. If, however, he could turn the company around, he might very well have been named CEO.
Bed Bath & Beyond
BBBY was founded in 1971. For nearly forty years, it was at the top of its game: the place to go for bedding, kitchen and dining necessities, appliances, and more. As the chain grew, it built 20,000 square-foot superstores that stocked huge numbers of popular brands and products available in all the colors of the rainbow. But as the second decade of the century approached, BBBY began to lose customers. Thanks in part to the economic crisis of 2008, some people turned to cheaper stores like Target or Walmart. Others purchased more and more online, from giants like Amazon and Overstock. Naturally, BBBY had made an effort to develop its own online services, but it was behind the curve. Amazon had a far greater selection.
By 2019, the company’s major investors were angry; they felt things had come to a crisis. Then-CEO Steven Temares was replaced by Mark Tritton, who, they hoped, would be able to replicate the success he’d enjoyed at Target. Then COVID hit in early 2020. At first, it wasn’t so bad, as people forced to stay home took a new interest in decorating and cooking. But that enthusiasm didn’t last. Sales slumped further, and the company closed 44 stores in eight states. Supply chain problems exacerbated the situation, as did increasing inflation in 2021 and 2022.
BBBY’s second quarter earnings report, for the period ended May 28, 2022, was dismal. Net sales had dropped dramatically—by 25.1 percent—from the same quarter the year before. Worse yet, the company’s Q2 2021 net loss of $50,874,000 had increased to a staggering $357,666,000.
In its discussion, management explained that it now had “four core banners”: Bed Bath & Beyond, buybuy BABY, Harmon beauty products and Decorist, an online design service. They were, they said, intent upon “becoming a digital-first, customer-focused omni-channel retailer with a more curated, inspirational and differentiated product collection across categories, and creating a more convenient and inspirational shopping experience.”
Ryan Cohen and the Apes
When compliance with the SEC’s amended Rule 15c2-11 became mandatory on September 28, 2021, the OTC market changed dramatically, and probably forever. On October 15, OTC Markets Group reported that 2,247 former Pink No Information issuers had been dumped to the Expert Market, where U.S. brokers will allow their clients to sell, but not buy. The “lotto plays” of the good old days are no more. Former penny addicts in need of a fix must look elsewhere. Some have migrated to the “meme stocks”; others have been buying stock and warrants in special purpose acquisition companies, known as “SPACs.”
Beginning in late 2020 and accelerating in the first few months of 2021, a large number of retail traders, most of them customers of the then-fashionable broker Robinhood, gathered at a sub-reddit called WallStreetBets to discuss their plays in realtime. Many were entirely new to the markets, and, like novices of any kind, thought they knew it all. Their picks were unusual, but some delivered spectacularly. One of the most popular, GameStop Corporation (GME), a brick-and-mortar video game rental outfit, zoomed from a little over $10 to a 52-week high of $483. (It currently trades at about $25. What goes up will come down.) Another favorite, AMC Entertainment Holdings (AMC), moved from the low single digits to $76.62, despite closing its theaters thanks to the COVID crisis. (It now trades at about $8.25.)
Many of those who profited on the meme stocks came to believe they were winners because they were brilliant, and that short sellers and analysts who saw the stocks as wildly overpriced were out of touch. They spent their days at WallStreetBets, where they posted thousands of mostly stock-related memes, and invented their own trading vocabulary. The movie Rise of the Planet of the Apes inspired them to call themselves “APES”; they borrowed “HODL” (“hold on for dear life”) from cryptocurrency fans; they took pride in being unafraid to “YOLO,” or place a dangerous “you only live once” trade.
The meme stocks ran mostly because their buyers created the hype that surrounded them. They weren’t promoted in the usual way; no one was paying for wash trading to raise the price gradually. No unsuspected insiders were lurking in the shadows, controlling the float. There were active short sellers, but at least in the early days, they were driven back by enthusiastic Apes. The Apes lacked the shorts’ deep pockets, but there were more of them, and they didn’t give up. They’d also learned to trade both stock and options—something not possible with penny issuers—to get more bang for their buck.
While the original meme stocks aren’t trading as dramatically as they did a year ago and more, they haven’t been forgotten by the Apes. And within the past months, BBBY has become a new object of their affection. One reason for that is that BBBY and GME have one important thing in common. His name is Ryan Cohen.
Cohen, a Canadian, founded Chewy, Inc. (CHWY), the pet supplies store, in 2011. While in the public mind he’s associated with the company today, he left as CEO in March 2018, a year before its IPO. When it went public in June 2019, it was valued at $8.7 billion. Since leaving Chewy, Cohen’s been an activist investor, working largely through his private firm RC Ventures. When the meme stocks came to life in late 2020, he took an immediate interest, making his first purchase in GameStop in December. In January 2021, he joined the GME board, bringing two Chewy executives along with him. He became chairman at the next shareholder meeting and continues in that position today.
In March 2022, it became public knowledge that Cohen had begun to invest in Bed Bath & Beyond, with a 9.8 percent stake. Needless to say, the Apes were thrilled and increased their own purchases. As he’d done with GME, he immediately began to offer criticisms and make suggestions. Shortly after his first investment in BBBY, he suggested the company had an “overly ambitious” strategy, overpaying top executives and failing to reverse market share losses. He said pointedly that “Mr. Tritton should recognize that chief executives who are awarded outsized compensation and seek frequent publicity also invite much higher expectations when it comes to growth and shareholder value creation.” He seems to have had a point. In 2019, between cash and stock awards, Tritton was paid $13.8 million.
Cohen’s remarks were no doubt remembered when the terrible Q2 numbers were revealed. Tritton was shown the door, and BBBY appeased Cohen by appointing three new directors who met with his approval. At the same time, Sue Gove, head of the strategy committee and independent director, took Tritton’s place on an interim basis.
On August 15, only a few weeks ago, Cohen reassured his supporters by filing a Form 3—an initial statement of beneficial ownership of securities—showing that on April 21, he’d purchased three lots of out-of-the-money call options. Their expiration date was January 20, 2023, and in order for them to be worth anything to Cohen, BBBY stock would have to rise to between $60 and $80 before then. A heady thought for the Apes. The stock jumped 23.55 percent that day, closing at $16.00. It continued to rise, closing at $20.65 on the 16th, accompanied by volume of 393 million. On the 17th, it leapt to an intraday high of $30, and closed at $23.08, on volume of 259 million. The next day, it dropped 19.64 percent, closing at $18.55.
The run was over, and for a very good reason.
While Cohen had retained the calls that will in all likelihood remain worthless until they expire in January, and by doing so had sparked a considerable run in the stock, between August 15 and August 18, he’d sold his entire equity position of 9.45 million shares. He collected at least $68 million, though some estimates are higher.
Could anyone have anticipated Cohen’s move? No, not really. He did file a paper Form 144 announcing he intended to sell his stock and options. Those sales were, as the filing says, “potential.” The form was submitted on August 16 and filed on August 17. Anyone with a Bloomberg terminal or something similar could have seen it on the 17th, but evidently, no one noticed. And he had, it appears, begun to sell on the 15th.
Jake Freeman, the “Lucky Kid”
Cohen wasn’t the only one who made out like a bandit on BBBY’s brief run. Jake Freeman, a 20-year-old applied mathematics and economics student at the University of Southern California, found himself able to turn his investment around for a quick and substantial profit. Freeman isn’t a kid gambling his tuition money. According to the Guardian, he’s “regularly” interned at New Jersey hedge fund Volaris Capital, and his uncle is a former pharmaceutical executive who helps manage Jake’s Freeman Capital Management fund.
Nor was he merely “lucky,” as some have said. Though he bought his BBBY stock at about $5.50 a share, he didn’t have to put up all the money for it. His family and friends did that, to the tune of $25 million. He bought in July, sold a few weeks later, and realized a $110 million profit. He says modestly he thought it’d take longer; perhaps six months.
When he filed his Schedule 13D to declare his greater-than-5 percent ownership, he also sent the BBBY board of directors a moderately long letter explaining how, he believes, the company can raise the money it so badly needs, while dealing with its long-term debt. Jake’s investment firm owns some of that debt. As he rightly said, the company “is facing an existential crisis for its survival.”
Pengcheng Si and His Class Action
On August 23, as the dust from Cohen’s sales was just beginning to settle, a Bed Bath & Beyond investor called Pengcheng Si filed a class action in federal district court for the District of Columbia. The allegations made by Si are complex, but put briefly, he claims that the company, JP Morgan Securities LLC (JPM), Ryan Cohen, Cohen’s RC Ventures, and Gustavo Arnal (whom he calls “Arnal Gustavo,” or “Gustavo,”) have conspired to engage in illegal insider trading, which has defrauded the company’s honest shareholders of $1.2 billion.
First, a little background: Pengcheng Si was born in China; we’re not told exactly when. He sometimes uses the first name Simon. He studied the law at Shanghai Maritime University, and then taught it in China, lecturing on “contemporary Chinese laws and politics with an emphasis on Chinese and international trade laws, including customs regulations, anti-dumping and countervailing duties, rules of origin, valuations, and classifications.” Once he’d moved to the States, he received an LL.M from Indiana University Law School. He now lives in the D.C. metro area and has been licensed to practice in the District of Columbia since 2013.
He says he’s represented clients required to “carry out internal audits in response to Federal Trade Commission (FTC) and SEC investigations.” He seems to have a particular interest in the False Claims Act, which informs some of the earlier litigation he’s brought in his own name.
Si is nothing if not patient and persistent. For more than 10 years he litigated a problem he saw with an entity called the Laogai Research Foundation, which is dedicated to prison reform in China. He’d worked for them as a computer technician, but suspected them of wrongdoing. The case was heard, interestingly enough, by Katangi Brown Jackson, shortly after she became a federal judge. She wrote a memorandum opinion in response to Laogai’s motion to dismiss Si’s complaint. She explains that:
The gravamen of Si’s complaint is that Defendants engaged in a scheme to defraud the government from 2001 through 2008 by, among other things, fraudulently inducing grant contracts by providing false information about employees’ backgrounds, reporting salaries for individuals who never performed work, using grant funding for personal expenses, and engaging in lobbying activity in violation of the grant contract.
This, along with other cases Jackson had ruled on, was examined by legal experts and other persons interested in her nomination to the Supreme Court. There seems to have been general agreement that she was thorough and did not stint in examining the claims of both parties from every possible angle. Judge Jackson did not dismiss the case; she gave Si, the whistleblower-employee, leave to amend his complaint. Alas, he was unable to satisfy her requirements, which appear to have been that the complaint state claims that can be understood, and for which there was some evidence. She did, however, not dismiss Si’s contention that “the termination of his employment constituted retaliation for engaging in protected activity in furtherance of the FCA.”
The litigation seems to have dragged on for some years longer, though it was not resolved to Si’s satisfaction. Harry Wu, the man he seems to have believed was culpable, died in 2016. On another front, in connection with an earlier qui tam action Si had filed against Laogai, Si ended up suing the Commissioner of the Internal Revenue Service. Unsurprisingly, he lost.
Pengcheng Si seems to be eccentric, but he also seems unlikely to let go of his suit against Cohen, JPM, and BBBY easily. Gustavo Arnal is no longer able to offer a defense.
Some shareholders seem concerned about the suit and the allegations it contains. Yet it suffers from many of the defects Katanji Brown Jackson saw in Si’s earlier efforts. The complaint suggests that Si lacks a good understanding of the securities laws. His class period extends from March 25, 2022, when Cohen began to buy, until August 18, 2022, when Cohen finished selling. He imagines an elaborate scheme involving collaboration and coordination among Cohen, Arnal, and JPM, yet he offers nothing, really, in the way of proof. Most of the complaint is little more than fantasy:
Upon… information and belief, Cohen approached Gustavo about his plan to accumulate shares of BBBY and to assume command of the company’s public float. Cohen convinced Gustavo that their plan would be a mutually beneficial one. With control over a significant portion of the public float, Cohen would essentially act as a price support for the stock while Gustavo would act in a similar capacity by controlling the sale of shares by Insiders. Under this arrangement, defendants would profit handsomely from the rise in price and could coordinate their selling of shares to optimize their returns.
Throughout, Si makes it seem as if Arnal had sold as much stock, and profited as greatly, as Cohen. He did not. He sold relatively little and was not a 10 percent or even five percent owner, to begin with. While he was an officer, and so disallowed from selling more than the equivalent of one percent of the issuer’s shares each quarter, he was not a director. He cannot have committed “illegal insider trading” because he was not, in the technical sense of the word, an insider.
Was There Any Wrongdoing?
Some investors seem to be alarmed by the suit, even suggesting it would have been a reason for Arnal to commit suicide. Class actions are a dime a dozen, and the officers and directors of exchange-listed companies have Directors’ and Officers’ (D&O) insurance. Had those concerned investors bothered to read the “legal proceedings” section in the company’s 10-Ks, they’d know a number of class actions and shareholder derivative lawsuits have been filed against BBBY and some of its officers since 2020. They are the least of its problems.
If the securities laws were violated with respect to Bed Bath & Beyond in the last weeks of August, the problem was not “illegal insider trading” or even a breach of fiduciary duty. It’s plain vanilla securities manipulation.
An article from Fortune, published as early as August 18, makes clear that some were already pointing fingers, and demanding an SEC investigation, very nearly before the metaphorical ink on Ryan Cohen’s last Schedule 13D was dry.
Short seller Stephen Geiger observed on Twitter: “Gary Gensler and the SEC doing nothing while billionaires are gamma squeezing their stock and then dumping it on retail investors in broad daylight. $TSLA $BBBY”
CNBC’s Jim Cramer joined the anti-Cohen chorus: “I will say this about Primatologist-in-chief Ryan Cohen: he has ridden a wave of Jane Goodall’s finest all the way to the bank.”
Former hedge fund manager Whitney Tilson was so angry he did something he’d never done before: he reported Cohen to the SEC, characterizing what Cohen did as “manipulation of a security,” and a “pump and dump scheme.” On the other hand, he sent his congratulations to Jake Freeman, noting that he “played the stock perfectly.”
Long or short, market professionals feel Cohen’s BBBY trades warrant looking into. It goes without saying that SEC Enforcement doesn’t discuss targets of investigations, much less the investigations themselves. But the Commission has been complaining about the “gamification” of investing, through flashy apps that rain confetti on users, or release multicolored balloons, presumably when those users spend money. While the Investor Advocate and the people in the Investor Education division have been trying to warn the vulnerable, no one seems to be paying much attention.
The Commission has sued Robinhood several times and is currently said to be investigating again. Yet the meme stocks are still with us. As several of the members of the finance community asked to comment on the BBBY fiasco said, the markets have become the Wild West. That used to be the case only in Pennyland, for the most part. Now it’s extended to the NASDAQ and the NYSE.
And because of it, and of what happened to Bed Bath & Beyond, Gustavo Arnal is dead. We don’t mean to dramatize, but it seems to us that if he hadn’t had to deal with a circus for months on end, he’d have been able to make it through last week. That is something everyone in the business should give some thought to.
To speak with a Securities Attorney about going public or SEC Registration Statements on Form S-1, please contact Brenda Hamilton at 200 E Palmetto Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected]. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
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Brenda Hamilton, Securities Attorney
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